Unemployment has been a major focal point for QSR. The price of gasoline, another significant variable in driving consumer discretionary spending, is providing an additional headwind in the Golden State.
As JACK CEO Linda Lang and other QSR executives have stated time and again, unemployment is proving to be a major headwind for top line growth. California’s unemployment rate for January is projected by the Bureau of Labor Statistics to be 12.5%, the highest of any of the states and well above the national average.
Yesterday, I listened to CKR’s fiscal 4Q10 earnings conference call and while there were no major incremental data points to speak of, it was interesting to hear management mention the higher gas prices in California at the moment. As the gasbuddy.com chart below shows, Californians are paying more at the pump than any other Americans. People in California, particularly Southern California, are also highly dependent on the automobile.
As if the unemployment outlook wasn’t dire enough, the chart below clearly shows that Californians are paying even more of a premium over the national average than they were twelve months ago. Gas price inflation of 32% in February, although less than the national average, certainly moved the needle. Prices staying constant, the outlook suggests that robust year-over-year growth in prices at the pump will continue to impact the Californian wallet. Although the rate of inflation will continue to lag some areas of the country (assuming current prices going forward), year-over-year growth in prices will range approximately between 34% and 18%. Indeed, as the chart below indicates, national gasoline price inflation is currently very high. This is impacting consumer discretionary spending, and all restaurants, across the board.
It is important to consider that the five most populous counties in California (Los Angeles County, Orange County, San Diego County, Riverside County, and San Bernardino County) account for 60% of the state population and are all in Southern California. Gas prices in Southern California are even more elevated than the state average; the most recent weekly data shows that the price per gallon in Los Angeles is 317.5 cents versus 313.9 cents in San Francisco.
Turning to stocks that this analysis is relevant to, many restaurants’ top lines are heavily levered to California. PEET, RUBO, BJRI, JACK, CPKI and CAKE are just a few of the restaurant stocks with high levels of exposure to the Californian market. The table below illustrates this.
Howard Penney
Managing Director